Daily Fintech Conversations

Which Bank Stocks to buy in the post Brexit rubble Challengers Incumbents or None?

Which Bank Stocks to buy in the post Brexit rubble Challengers Incumbents or None

Consider this like a digital version of old-fashioned investing club where friends got together with some social lubricant and discussed stocks, sharing their experience/insights. Sort of a very small version of wisdom of the crowd. Sorry about the lack of tea/coffee or something stronger.

I created this as a Wiki, so add any I have missed. If somebody wants to add data points to these stocks or insights, that would be brilliant (as we say in Blighty)

Challengers

  • Shawbrook
  • Aldermore

Incumbents

    • Lloyds
    • Barclays
    • RBS
    • Santander
    • Standard Chartered

Hard to tell: Virgin Money: new brand, old bank.

Strategic tailwind: PSD2 favours Challengers, but post Brexit, we don’t know how this will play out.

Questions:

  • Recession risk. It looks like England will enter recession. What happens to default rates and assuming more QE and prolonged ZIRP, what will happen to deposits?

  • Is there any difference in customers between Incumbents and Challengers? If so, how does this change the default risk assumptions?

Arguments for Challengers

  • Small means lower costs
  • Small means they will partner with Fintechs rather than trying to save old legacy systems
  • PE of both is very low
  • They have lots to gain and little to lose as their current market share is so low.
  • The UK Government will eventually do the sensible thing on PSD2 (while making noises about those pesky Brussels bureaucrats and this will give them a major tailwind advantage)

Arguments for Incumbents

  • Challenger stocks are in Small Cap Hell
  • No challenger has ever won in the past, the Big Four always win in the end.
  • You need scale to withstand rough weather (seems like a Titanic argument to me)
  • Today’s Challengers Banks will be disrupted by the next wave of Challenger and the Incumbents have the market cap to buy them

One Incumbent that looks attractive is Santander as they have many attributes of a Challenger.

Arguments for None

  • List item

Bank Financials are just too hard for retail investors to understand, with big hidden risk under layers of obfuscation.
The Fintech Challenge is real

Lets co create an answer and pick up some gold in the rubble (or avoid fool’s gold).

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Should HSBC be in the listing?

Challenger banks dont have access (yet) to lower cost of funding from the BOE, as the regulated incumbents. I know they had requested it, but I am not clear where this stands.

Challenger banks will not be bailed out in case of troubles!

Already the Treasury took measures to protect the incumbents, by postponing the sale of stakes in Loyds and RBS.

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I like BBVA, Lloyds, Barclays. + Aviva as an insurer!

Out of the more FinTech types I like PayPal, but I did not dare to buy PayPal yet. Why? PayPal is absolutely underestimated. It is a decade more wise FinTech than 99.9 pcnt of FinTech companies (usually being formed after 2008); but PayPal was formed in 1998. PayPal is a FinTech which is in 200 countries with over 175 mn active customers. It is the crystal ball to show the one decade forward-looking future of any other FinTech companies. (E.g. Transferwise, etc) But the reason I don’t dare to buy it is that the price has been too stable. Anyway, there is STRONG rumor that PayPal will soon be an acquisition target. And I wonder at what price-level that deal will go through (and who the buyer will be).

Plus the ones I did dare to buy - as I listed above earlier:
BBVA: Very innovative, probably undervalued, punished by the market, yet to me it seems to be like a really forward-looking bank. One that will surely survive - and not just because it is TBTF.
Barclays & Lloyds: Mrs May will tomorrow probably give a speech. It is an imperative to say something positive to the markets. FTSE 100: rebound. UK Bank: not yet rebound.
Aviva: A good company, will probably react very positively to the prospect of a new vision for the UK (if in fact we get it from the new PM)…

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@DavidGyori Welcome to Fintech Genome. Like your selection. I also like Santander for same reason as you like BBVA - real innovation - have not done any research to know which is better. Taking an Antifragjle approach I like LC (Lending Club) at these beaten down prices but it might take years for that value to emerge. I think Banks will be stressed in next recession and the robust will survive but the Antifragile will win big and the MarketPlace Lending model is fundamentally better even if individual companies make lots of mistakes.

Banks that become as efficient as a Fintech but at scale will be big winners, but have not found any yet where the numbers look compelling. Also I find Bank stocks hard to evaluate, the balance sheet is often so complex and that worries me, cannot invest in what I cannot understand.

Generally I think this is a good time to be a stock picker because a) few people do this now (it is all HFT, ETF and Quant) and b) you can buy public tech stocks like LC for less than you can in the private market without either fees or liquidity issues.

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I tend to agree with Santander. Btw: Santander is quite active in marketplace-lending (e.g. Funding Circle). I am very very very very ambivalent about P2P Lending and Crowdfunding. I may differ from you in this. I understand your positive opinion about these (P2P and Crowd). So in my eyes Santander’s involvement in these is a negative. BUT, I really really like Ana Botin. I think she is a SUPERB CEO and she is a very remarkable strategist. I trust her - not the balance sheet of the bank itself. So the ‘Ana Botin Effect’ makes me join you in being positive about Santander.
I have been working with banks a lot and my usual observation is (and it is much beyond the specific example of Santander) that the persona of the CEO matters a lot. For example PayPal’s (though it is not a classic bank - yet they have a couple of licenses e.g. in Luxembourg) Dan Schulman is also quite strong (that is also a positive for PayPal.
I really want to buy PayPal stocks, maybe in the coming days I will. I am hesitant though. What is your opinion about PayPal as a company? (I am not asking about the stock, because that is too uncertain.) PayPal is basically far the largest e-wallet in the world. Who do you think will acquire them?

@DavidGyori Interesting. I am a sceptic on Equity Crowdfunding - too opaque and ripe for scams based on FOMO and “social proof” (e.g. celebrity x invested so here is my kid’s college fund). But I am pro MPL because I have seen lots of individual retail investors get good returns (its not easy and they have to work it, but compared to bank deposits, sovereign bonds the RAROC is good). I agree re bank leaderships is key. Its like IBM without Lou Gerstner would no longer be here.

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About BS of banks: yes, any uncertainty on the balance sheet of any classic bank has an amplified impact on ROC. Why? Because the unprecedentedly high leverage on the balance sheet is an inherent effect of the entire (yet absolutely necessary) concept of fractional-reserve banking. So the balance sheet of a bank is a very delicate thing and in terms of ROC it has magnified, amplified, multiplied, leveraged importance - directly derived from the very concept of fractional-reserve.
Do I have the resources to do thorough BS analysis? No. So I take the pricing so that BS analysis is already done by ‘the market’ and my added value is to understand the tactics & strategy of the given bank better than the market. (And also some macro-strategic and macro-monetary things - e.g. one of the absolutely underestimated things is the so called ‘liquidity trap’ described by Keynes which actually - in my opinion - is heavily impacting current US macro-monetary circumstances.)

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Banks or insurance companies or IT vendors?

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Yes. Italian Banks (big)

Yes. Peer to peer. Wish I had bought more bank stocks. I didn’t move fast enough-but perhaps there will be another dip.

I bought some more Lending Club after it dumped with everything else. Not brave enough to buy big Banks yet, I find their balance sheet too opaque to understand.

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Lending Club and Paypal are two Fintechs getting penalised today.
I will look to buy LC tomorrow. Maybe this is the buyout weekend (usually on long weekends buyouts and capital controls are announced ).

http://blog.tipranks.com/2016/06/analysts-weigh-in-on-two-fintech-stocks-lendingclub-corp-lc-and-paypal-holdings-inc-pypl/

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Prefer buyouts to capital controls

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What about Worldpay? It has been hit about 10% since Brexit.
Is the market overlooking that they have their Dutch division to overcome any Brexit related frictions? Or is it looking at the fact that they are major UK players (rather than European) and pricing a UK recession?
They are actually positioned with the broadest reach compared to other players.
Any PE estimates?

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@Efi: Just one general reaction: if Europe falls apart remittance services gain momentum. (The Eurozone is the worst thing for remittance services.) I.e. if Brexit is a propensity for the EUR zone to disintegrate that is a BUY sign for remittance services. So the market probably mis-prices Worldpay. I think you have spotted this very well. (Maybe my reaction is late.)

I am not saying the EUR zone would fall apart, I am just speculating “if”.

This week I have swapped Barclays shares to Lloyds shares. Because I felt a gap in the relative pricing. After a rally in Barclays stocks (better than expected earnings) I sold Barclays and put the same money into Lloyds.
This week I also bought Wells Fargo. Only after I bought it did I see in the ownership structure that “my friend” Warren is deeply into Wells Fargo. I expect an aggressive rate-hike-cycle in the USA and that would benefit banks which expanded dynamically at times when others (e.g. Citi or HSBC) contracted.
In the UK I think Carney will do something unexpected this week. I think rates will remain unchanged. 0.5 percent. Carney is very much against QE. So he will come up with something new to stimulate banks. Something which is not about buying bonds, but about somehow pushing banks to be more active in lending or something. I am unsure about this BoE thing. Maybe Carney will do QE. But I just have a hint that he will leave rates unchanged. (Which btw will ceteris paribus push bank-stocks up.)

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